Will Legal Marijuana Destroy This Company?

Americans are mellowing out on pot. A recent Gallup poll found 51% of Americans favor legalizing the use of marijuana -- and although that figure is down from a decade-high of 58% in 2013, the trend continues toward one of acceptance. For example, a decade ago the percentage of Americans that favored legalization was only 34%.

So although the Drug Enforcement Agency continues to classify marijuana as a Scheduled 1 controlled substance, denoting no medical use and a high potential for abuse, states are responding to changing perceptions by introducing a host of decriminalization and legalization measures. According to NORML, seventeen states have passed some form of decriminalization and four states have legalized (or in the process of legalizing) the drug: Alaska, Washington, Oregon, and Colorado.

As always, there are winners and losers with any major legislative about-face. And if any publicly traded company is a loser from a push to decriminalization, it would be Corrections Corporation of America -- the nation's largest publicly held prison operator. The company is dependent upon its 90,000 prison beds to be filled to enrich shareholders -- any risk to the prison population will directly affect its shareholders.

Mandatory minimums, maximum profitsThe truth is, in modern U.S. history, we're living among the safest times ever. Take Washington, D.C.: After homicides peaking at nearly 500 in 1991and earning the moniker "The Murder Capital," the number of homicides dropped to 105 last year. For a nationwide comparison, 30 years ago you were 80% more likely to be a victim to a violent crime, 84% more likely to be murdered, and 113% more likely to be robbed. Unfortunately, we're living among a mania-inducing media that seeks to monetize fear for advertising-based revenue and lives by the maxim, "if it bleeds, it leads."

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Those fantastic statistics aside, in the last 30 years the U.S. federal prison population has exploded by 800%. And if you're having problems rectifying these two realities, the difference has been the rise of harsh, mandatory sentencing for nonviolent drug offenders.

And while it is important to note nonviolent drug offenders include more than just marijuana prisoners, the dual threat of state marijuana legalization/decriminalization and federal reforms are a direct threat to its investment thesis.Don't believe me? Per Corrections Corporation [emphasis added]:

The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them.

Is the federal government coming around?More recently, the federal government appears to be addressing these concerns. After the success of the Fair Sentencing Act in 2010 that dealt with cocaine possession, Attorney General Eric Holder urged changes in federal sentencing guidelines for nonviolent drug offenders as a part of his Smarter Sentencing Act push -- which ultimately failed to pass into law. Senators Rand Paul (R - KY) and Corey Booker (D - NJ) have continued to offer reforms on non-violent drug sentencing and recordkeeping.

The senators' REDEEM Act aims to help former offenders succeed post-conviction and to address America's huge prison tab that amounted to $80 billion dollars in 2010 at both the federal and state levels. The act was introduced in the Senate but found the fate of most bills introduced in the 113th Congress -- not acted upon.

In a widely quoted study, The Price of Prisons, the cost to incarcerate one person amounted to $31,307 per year. And while it is important to note that releasing a prisoner will not save that amount due to the fixed nature of prison costs, it is important to note America spends less than half of that total on K-12 education, and prison expenses are the second-largest state expenditure behind Medicaid. So while it is easy to forget about America's incarcerated population, they're costing taxpayers dearly.

Maybe not ...On the marijuana legalization issue, however, advocates have not been so lucky. DEA Chief Michelle Leonhart refused to acknowledge the difference between marijuana and crack cocaine and grumbled about the failure of the DOJ to sue Washington and Colorado for legalization. After meeting with Attorney General Holder, she's slightly changed her tune. And recently, after the District of Columbia legalized marijuana, Congress blocked the deal through a spending bill with language denying its implementation.

Finally, Oklahoma and Nebraska are suing Colorado for its legalization efforts. If the Supreme Court comes down on the side of the plaintiffs, it is entirely possible for the legalization movement to lose steam. And if that happens, Corrections Corporation of America -- and its shareholders -- can count on housing nonviolent offenders for years to come.